Rockwell Automation (ROK) shares recently sold off sharply on earnings but landed and held at key support. Although there have not been a lot of option trades there was a put sale that stood out. So, let’s take a closer look at Rockwell.

Options: On 1/31 into weakness the July $240 puts sold to open 500X at $8.35, a willing buyer of 50,000 shares at a cost-basis of $231.65, a position size of nearly $11.6M. ROK has also previously seen 500 April $270 puts sell to open.

Technical: ROK shares dropped hard on earnings but held a 61.8% Fibonacci, AVWAP from the 2020 lows, long-term VPOC, trend support and the 200-week EMA, a confluence of multiple major supports as shown below. Weekly MACD has rolled over to a bearish signal, and it will be important for shares to hold the $245 level.

Fundamentals: Rockwell is the world’s largest company dedicated to industrial automation and digital transformation. Intelligent Devices, Software & Control, and Lifecycle Services are its three operating segments. The Intelligent Devices segment includes drives, motion, advanced material handling, safety, sensing, industrial components, and configured-to-order products. The Software & Control segment includes control and visualization software and hardware, digital twin, simulation and information software, and network and security infrastructure. The Lifecycle Services segment includes digital consulting, professional services including engineered-to-order solutions, recurring services including cybersecurity, safety, remote monitoring, and asset management, and the Sensia joint venture.

Valuation: ROK has a market cap of $30.5B and now trades 19.65X Earnings, 16.6X EBITDA and 26.85X FCF with a 1.9% dividend yield. ROK revenues are seen rising 2% in 2024 with 3.1% EBITDA growth and each seen accelerating in 2025 with 4.9% and 7% growth respectively. ROK valuation is near the low-end of its recent range and bottomed out near 13X in 2018-2020 while 22X the high-end.

Industry: The industrial automation market is a rapidly growing sector that encompasses the use of technology to control and optimize industrial processes. The industrial automation market is forecasted to grow to $400B by 2029 from $395B in 2022, a CAGR of 9.8%. Process Automation, Discrete/Factory Automation, and Warehouse Automation are a few subsets. Industrial Robots, Programmable logic controllers (PLCs), Human-machine interfaces (HMIs), Industrial software and Industrial Sensors fall into this market. Industrial automation can help businesses to increase their production output and reduce their costs. As labor costs continue to rise, businesses are increasingly looking to automation to reduce their reliance on human workers.

Themes: Clearpath Robotics is a leader in autonomous robotics for industrial applications. The Industrial mobile robot market is slated to grow 30% per year over the next 5 years to $6.2B by 2027. Key growth drivers were outlined below at its November Investor Day

Competition: Major competitors include Siemens AG, ABB Ltd, Schneider Electric SA, Emerson Electric Co., Mitsubishi Electric Corp., Honeywell International Inc., AVEVA Group plc, Dassault Systemes, and Aspen Technology, Inc. I provided metric comps below and can see AME remains a preferred name but ROK screens strong particularly on ROIC, ROCE, FCF/Debt and Fixed Asset / Working Capital Turnover.

Ownership: The last insider purchase was in May 2022 and May 2021 for $243K and $131K respectively at $219.62 and $262.11. Short interest is minimal at 1.7% of the float. ROK is not a concentrated holding in any of the notable funds.

Analyst Notes: Analysts have an average target of $290 on shares. JPM cut its target to $230 saying it was one of the worst prints this quarter. OpCo reduced its target to $300 with 2H24 expected to be much stronger and positive on Q1 orders and early Q2 trends. UBS lowered its target to $325 noting production challenges drove margin pressures in Q1 and sees all issues transitory. Wells Fargo also noted demand commentary was upbeat. Baird with a $310 target says automation demand backdrop remains solid/accelerating, and the company’s expanding solution breadth, geographic positioning, offers it multiple growth levers.

Management Commentary: On the latest earnings call…

“Last quarter, I talked about our presence in datacenter build-outs, and Cubic’s momentum with large cloud service providers continues to fuel our growth in this end-market.”

“Total annual recurring revenue was up 20% year-over-year, with strong growth across our Plex and fixed SaaS offerings and recurring services, including our growing cybersecurity business.”

“While auto customers are focused on near-term profitability and temporary slowdown in EV demand, they continue to fund new EV and battery CapEx programs. In addition to these investments, we are seeing increased activity across our traditional ICE and plug-in hybrid platforms as brand owners and tier suppliers are looking to diversify their exposure in response to consumer demand and infrastructure limitations. Rockwell has a substantial installed base with these established automotive customers and is well positioned to capture additional market share regardless of the application.”

“Within our e-commerce and warehouse automation industry, sales declined mid-teens and were in line with our expectations. Customers across many verticals continue to modernize their existing operations to match the current market’s needs. In addition to a strong funnel of these warehouse transformation projects, we’re starting to see renewed CapEx plans from our e-commerce customers for fulfillment center builds later in fiscal year ’24 and in fiscal year ’25.”

“We continue to gain share across our key platforms, especially here in North America. We are seeing early orders from customer projects facilitated by economic stimulus, and automation continues to be an important way to maximize the productivity of available workers. Our recent acquisitions are performing well on both revenue and cost, with Clearpath Robotics being a standout addition to Rockwell’s portfolio. We’ve seen multimillion dollar wins across diverse end-markets, including automotive, food and beverage, and even warehousing and logistics. And this is just the beginning.”

Recap: ROK is coming off a quarter where it was blindsided by multiple headwinds, all of which appear  transitory and the longer-term demand story remains firmly intact. ROK is a very well-run company that should be able to regain investor trust as the back-loaded 2024 story plays out later this year and this latest quarter was the likely kitchen-sink quarter.

Trade to Consider: The July $240 short puts near $7 is an ideal trade in the name as valuation should be supportive at that level along with the confluence of technical supports. One can also consider moving out to December $250 short puts at $16.